I have enjoyed FMG's share price movements over the years and now we have the FY2017 statutory accounts it is time to update my valuation models. The valuation techniques I use are:
1. EV/EBITDA
2. PER
3. EV/FCF
I used BHP as my comparison company and calculated the above ratios using the FY2017 statutory accounts and the ASX SP on 11/9/17. The results are as follows:
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
| 1 |
|
Units |
EV/EBITDA |
PER |
EV/FCF |
| 2 |
BHP |
Times |
4.2 |
12.9 |
5.9 |
| 3 |
Note:
1. Numbers extracted from FY 2017 Statutory Accounts.
2. Numbers are for continuing operations only and exclude extraordinary items.
3. Sustaining capital is calculated as 14% of operating cashflow (Same as FMG)
4. ASX SP for BHP is dated 11/9/17
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I applied these ratios to FMG and the results are as follows:
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
|
|
EV/EBITDA |
PER |
EV/FCF |
Average |
| 2 |
FMG EV |
US$m |
19652 |
26999 |
23022 |
N/A |
| 3 |
FMG MC |
US$m |
17019 |
24366
|
20389 |
N/A |
| 4 |
AUD/USD |
|
0.80 |
0.80 |
0.80 |
N/A |
| 5 |
FMG MC |
A$m |
21274 |
30458 |
25486 |
25739 |
| 6 |
NOS |
m |
3113 |
3113 |
3113 |
31131 |
| 7 |
FMG MC per share |
A$ |
6.84 |
9.78 |
8.19 |
8.27 |
| 8 |
Notes:
1. Numbers extracted from FY 2017 Statutory Accounts
2. Numbers are for continuing operations only and exclude extraordinary items
3. MC = EV + Cash - Debt
4. ASX SP for FMG is dated 11/9/17
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So using BHP's ratios, the theoretical average FMG SP = A$8.27. The actual FMG SP on 11/9/17 was A$5.80 which is a discount of 30% to the theoretical SP. Their are a number of differences between BHP and FMG which may explain this discount:
1. FMG is a one product company whereas BHP is multi product.
2. FMG's iron ore is a lower grade than BHP's and sells at a price discount to Platts of around 25% (FY2017)
3. FMG's interest gearing is 14% whereas BHP's is 12%.
These will increase the perceived business risk of FMG vs BHP and result in FMG trading at a discount to BHP. However I don't believe the 30% is now justified for the following reason:
1. FMG's balance sheet gearing is 27% whereas BHP's is 26%. They now both have the same net debt structure whereas in prior years FMG's gearing was higher.
2. FMG has declared it will pay a future dividend equal to 50-80% of PAT. If this had been applied toFY2017, the dividend would A$0.43 (At 65% payout), a gross yield of 7.4%. BHP's dividend yield is 3.96%.
Hence the 30% looks like a historic price discount which has not yet adjusted for the new and improved FMG. Product risk still remains but my guess now is that this should be no more than 10%. This adjusts the theoretical FMG SP to A$7.44 (A$8.27 x 90%).
Eventually I'm hoping the current FMG SP of A$5.80 moves closer to A$7.44 which would be a very profitable move indeed.
Please note all the above is my work only and could be materially incorrect so DYOR
(20min delay)